ISO Computer Sytems Coverage Form

ISO COMPUTER SYSTEMS COVERAGE FORM ANALYSIS

(April 2018)

 

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INTRODUCTION

The Insurance Services Office (ISO) Computer Systems Coverage Form covers computer equipment, data, and media that are associated with computer systems that businesses use to conduct their operations. It also covers air conditioning and fire suppression equipment used exclusively with the computer equipment, as well as computer equipment, data, and media that belongs to others but that are in the named insured's care, custody, and control.

POLICY CONSTRUCTION

Computer Systems Coverage requires at least the following six forms:

Related Article: IL 00 17–Common Policy Conditions Analysis

Related Article: CM 00 01–Commercial Inland Marine Conditions

IH DS 75–COMPUTER SYSTEMS DECLARATIONS

This analysis is of the 06 14 edition. Changes from the previous edition are in bold print.

The advisory Computer Systems Declarations does not have spaces for the named insured, its mailing address and other named insured information, the policy period, or the description of the insured business. That information is on the Common Policy Declarations. IH DS 75 contains the following information:

Insurance Company and Producer Name

The name of the insurance company that provides the coverage and the name of the agent or broker that produces the business are entered in the spaces provided.

Limits of Insurance

This section has spaces to enter the limits of insurance. Specific entries are available for the following:

A description of the premises is entered. The separate limits for computer equipment and media and data are entered beside it.

The separate limits for computer equipment and for media and data are entered.

The Declarations provides a place to enter only a computer equipment limit but nothing in the form excludes coverage for data and media in transit so this could be an error in the Declarations.

One limit is entered that applies to all loss and damage. This is the most that will be paid in a single occurrence.

Coinsurance

This section has a space to enter the coinsurance percentage that triggers the coinsurance additional condition, if coinsurance applies.

Deductible

This section has a space to enter the amount of deductible that applies.

Optional Coverage–Virus, Harmful Code, or Similar Instruction (06 14 addition)

This section has spaces to enter revised limits for the following:

Note: This should not be labeled as an optional coverage. It should instead be labeled as only a revised limit of insurance for this Additional Coverage. It is confusing to refer to it as an Optional Coverage on the declarations but as an Additional Coverage in IH 00 75.

Rates and Premiums

This section has spaces to enter the rates and premiums.

Special Provisions

Any special provisions are entered in the space provided.

IH 00 75–COMPUTER SYSTEMS COVERAGE FORM ANALYSIS

This analysis is of the 06 14 edition. Changes from the previous edition are in bold print.

Introduction

This section encourages the careful reading of the entire coverage form to determine what is covered, what is not covered, rights, and duties. It defines we, us, and our as the insurance company that provides this insurance coverage. It also defines you and your as the named insured on the declarations. The reader is also pointed to the Definitions section because certain words or terms used in the form have a more broadened or restricted meaning.

A. Coverage

The insurance company pays for direct physical loss or damage to covered property but only when that loss is from a covered cause of loss.

1. Covered Property

Covered property is computer equipment, data, and media that the named insured owns. It is also similar property of others that is in its care, custody, or control.

 

Example: Ernie’s Electronics insures its building and business personal property, including its stock of computers and related media and data it holds for sale under CP 00 10–Building and Personal Property Coverage Form.

Ernie’s removes the values of its owned computers that are used in the business along with the property of others that are in for repairs from its CP 00 10 limit of insurance because Ernie’s uses the Computer Systems Coverage Form to insure them. Over the weekend, a fire from a short circuit overwhelms the fire suppression system and destroys all personal property inside the building. The fire also causes extensive damage to the building itself. The loss is adjusted satisfactorily because CP 00 10 covers the merchandise held for sale and the Computer Systems Coverage Form covers both Ernie’s owned computers and the computer property of others.

2. Property Not Covered

The following described property is excluded:

a. The named insured’s owned property that is leased or rented to others. There is an exception. These items are covered while on premises just not when the property is away from the premises described on the declarations.

b. Accounts, bills, evidences of debt, valuable papers, abstracts, records, deeds, manuscripts, or other documents

Note: These items become covered property once they are converted to data. However, they are covered only in data form.

c. At one time, the desktop computers were called portable computers but that is not what the item is referring to. The modern concept of portable computing refers to those computers that travel away from the desk and out of the office. So laptops, notebooks, and tablets are not covered along with other more highly mobile devices.

Note: This exclusion could also apply to I-pads, cell phones with Internet access, and other devices that could be considered portable personal computers. This property can be covered by attaching IH 75 02–Portable Computers endorsement to this coverage form.

d. Contraband. Any property that is illegal to own or that is in illegal trade or transportation is not covered.

e. Stock in Trade

Note: Refer to the example that involves the loss at Ernie’s Electronics above. CP 00 10 covered the property that consisted of stock in trade.

3. Covered Causes of Loss

Covered causes of loss are direct physical loss or damage to covered property, except for those losses that are   excluded.

4. Additional Coverages

Some of the following additional coverages are also additional amounts of insurance.

a. Additional Acquired Premises

The named insured may acquire additional locations or premises during the policy period. If it does, covered property at that location or premises is covered for up to 60 days. The most the insurance company pays for any loss or damage to the covered property at the new premise is 25% of the limit of insurance for all covered items listed on the declarations or $100,000, whichever is less. The named insured must report the value of all covered property at the newly acquired property to the insurance company within 60 days after it takes possession. It must pay premium for that property starting from the date of acquisition. If the location or premises is not reported, coverage ends 60 days after the named insured acquires the premises or at the expiration date, whichever is first.

b. Debris Removal

Coverage applies to the costs that are incurred to remove the debris of covered property damaged by a covered cause of loss at a described premises. The expenses must be reported to the insurance company in writing within 180 days of the date of loss. The most paid is 25% of the sum of the following:

This limitation does not apply to the provisions in C. Limits of Insurance 2. Debris Removal.

c. Preservation of Property

Covered property may need to be moved from an insured location in order to keep it from being damaged by a covered cause of loss. In order to avoid that impending loss, the insurance company pays for any direct loss or damage such property sustains during the move. In addition, coverage applies at the location where the property is stored for up to 30 days after the date it was moved there.

This additional coverage does not increase the limit of insurance and is not subject to any exclusion.

Notes: There are several important points to consider:

The property removed must be moved back to the covered location or the temporary location must be added to the policy within 30 days from the date of the move. Otherwise, all coverage ends after 30 days.

d. Recharging the Fire Suppression System

The insurance company pays up to $10,000 to recharge fire suppression systems that protect the named insured's premises. This very broad coverage pays regardless of why the system discharged.

 

Example: It was Mabel’s 70th birthday so the IT department bought a small cake and decorated it with 70 relighting candles that were closely packed together for the ultimate prank effect. Unfortunately, the heat from those candles ignited the automatic extinguishing system in the computer room. The good news is that the recharging of the system was covered.

 

e. Virus, Harmful Code, or Similar Instruction

This Additional Coverage first defines electronic data and computer programs with respect to this Additional Coverage.

The following apply, subject to this Additional Coverage’s provisions:

If electronic data is not replaced or restored, the loss is valued at the cost of replacement with similar blank media.

Once the period of restoration ends, business income coverage ends even if part of the limit of insurance has not been used. The most the insurance company pays is $5,000 for all loss or damage on an annual aggregate basis, regardless of the number of occurrences, premises, locations, or computer systems involved. The limit applies separately to direct physical loss or damage and to loss of business income. This limit can be increased.

 

Example: The infamous Melissa virus had worldwide effects and A-to-Z Accounting Services did not escape its wrath. However, A-To-Z had the foresight to realize its vulnerability if something along the lines of Melissa should strike, especially during its busy tax preparation and annual financial reports and audits season each spring. For this reason, A-To-Z bought and paid for a substantially higher limit of insurance against computer viruses and extended the coverage to apply to its loss of business income as well. When Melissa struck, A-To-Z was hit hard but its recognition of its risk and the loss potential before the loss occurred (and its treatment of the effects of the risk) enabled it to escape all but a comparative few dollars of the damage the virus inflicted.

 

Note: The previous edition of IH 00 75 included Optional Coverage–Extra Expense. This 06 14 edition does not. The revised 06 14 edition of IH 99 28–Business Income and Extra Expense now provides this option. It also adds definitions for Computer Equipment, Data, and Media that correspond with the coverage in
IH 00 75.

B. Exclusions

1. Primary Exclusions

The first group of exclusions applies whether or not the loss event results in widespread damage or affects a significant geographical area and is essentially absolute. Subject to specific exceptions, each is totally excluded, regardless of any other cause or event that contributes to a loss, either concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or that results from any of these events.

a. Governmental Action

This exclusion applies to the legal and authorized seizure or destruction of property by a government entity’s order. There is one exception. Loss or damage that is caused when the governmental entity orders property to be destroyed is covered if used as a method to prevent a fire from spreading is covered. However, this exception applies only if the fire being contained would have been a covered fire under this coverage form.

c. Nuclear Hazard

Nuclear reaction, radiation, or radioactive contamination is not covered. There is an exception. If a fire results from   the nuclear reaction, radiation or radioactive contamination there is coverage for the direct loss or damage caused by that fire.

d. War and Military Action

This exclusion lists three specific warlike activities.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or that result from any of the following loss events. Some of these exclusions have exceptions, conditions, or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or that result from any of these events.

a. Delay, loss of use, and loss of market

These are consequential or indirect losses that develop as a result of a direct loss or damage.

b. Dishonest or criminal acts

Any dishonest or criminal acts that the named insured, its partners, employees, temporary employees, leased workers, officers, directors, trustees, authorized representatives, or members and managers of a limited liability company commit. Theft is one of those dishonesty acts.

Such acts committed by anyone with an interest in the property, their employees, temporary employees, leased workers, or authorized representatives who act alone or who act in collusion with other parties or with each other are also excluded. This exclusion applies 24 hours a day/7 days a week.

There is one exception. Acts of destruction by the named insured’s employees, temporary employees, leased workers, or authorized representatives are covered but theft by any of them continues to not be covered.

c. Unauthorized instructions

When covered property is transferred to another person or place because unauthorized instructions were received to do so.

d. Virus, harmful code, or similar instruction

Any virus, harmful code, or similar instruction that is designed to damage equipment or disrupt operations. It could be added to or made part of a computer system, its data, or be added at the network connection. However, it is added, the direct loss or damage to covered property it causes is excluded. There is an exception for coverage provided by A. Coverage 4. Additional Coverages e. Virus, Harmful Code, or Similar Instruction.

e. Work upon the property

Loss or damage that is caused by or that results from the actual processing or work being done on covered property. There is an exception. When the processing or work being done results in a fire or explosion, coverage applies to the loss or damage that fire or explosion causes but only if the fire or explosion are considered covered causes of loss under this coverage form.

Note: The excluded work is not specific to covered property but instead is on property. This means that work on property not covered could also invoke this exclusion.

f. Neglect

Neglect on an insured’s part to do take reasonable measures to preserve and protect covered property from subsequent damage during and after the time of loss.

 g. Theft

Theft by any person the named insured entrusts covered property to for any reason, whether they act alone or act in collusion with any other party. This exclusion applies 24 hours a day/7 days a week. There is one exception. Covered property that is in a carrier for hire’s care, custody, or control is not subject to this exclusion.

3. Other Exclusions

This group of exclusions applies to loss or damage caused by or that result from any of the following loss events. In every case, if loss or damage by a covered cause of loss occurs as a result of one of these excluded events, coverage applies to the loss or damage the resulting covered cause of loss causes. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Wear and tear, depreciation

Wear and tear is damage that occurs naturally as a result of aging or normal wear.

Depreciation is loss of value due to wear.

b. Any quality in the property

These are any qualities in the property that cause it to destroy or damage itself.

Note: An example is loss or damage caused by hidden or latent defects in the property.

c. Insects, vermin, or rodents

Loss or damage to covered property when caused by or that results from insects, vermin, or rodents.

Note: Some examples are damage from mice, rats, cockroaches, squirrels, beavers, spiders, ants, centipedes, and ticks. Each is characterized by destructive habits that cause damage, such as gnawing and nibbling.

d. Corrosion or rust

This is corrosion or rust that causes loss or damage to covered property.

Note: Rust and corrosion are low-temperature oxidation processes that result in deterioration over time due to inactivity or neglect.

Note: The previous edition of IH 00 75 had a specific exclusion for Optional Coverage–Extra Expense. This 06 14 edition does not because it does not provide that optional coverage.

C. Limits of Insurance

The limit of insurance on the declarations is the most that will be paid for loss or damage in a single occurrence. Payments under 4. Additional Coverages b. Debris Removal do not increase the limit of insurance that applies. The only exception is that up to an additional $10,000 in a single occurrence is available under the following circumstances:

The limits of insurance for all other Additional Coverages are additional amounts of insurance.

D. Deductible

The deductible on the declarations must be exceeded before the insurance company pays anything. Once the deductible is satisfied, the insurance company will pay up to the limit of the insurance that applies. The deductible applies on a per occurrence basis.

E. Additional Conditions

1. Valuation

This condition replaces the Valuation General Condition in the Commercial Inland Marine Conditions.

 The value of lost or damaged property is the following:

a. The value of computer equipment depends on whether or not the damaged equipment is repaired or replaced.

b. The value of data is the actual cost to reproduce it. If it is not reproduced or replaced, payment is limited to the cost of media that does not have any data stored on it.

c. The value of media is based on the cost to repair or replace it with property similar enough to do the work required.

2. Other Conditions

These conditions apply in addition to the Commercial Inland Marine Conditions and the Common Policy Conditions.

a. Coverage Territory

The coverage territory is the United States of America, its territories and possessions, Puerto Rico, and Canada. This includes property that is shipped by air within and between these points.

b. Coinsurance

This condition applies if there is a coinsurance percentage on the declarations.

The insurance company does not pay the full amount of any loss or damage if the value of covered property at the time of loss or damage multiplied by the coinsurance percentage is more than the limit of insurance for all covered property at that location. In such cases, the amount the company pays is determined as follows:

Step 1. Multiply the value of the covered property at the time and location of the loss or damage by the coinsurance percentage on the declarations.

Step 2. Divide the limit of insurance for covered property at the location where the loss or damage occurred by Step 1.

Step 3. Multiply the total amount of loss or damage at the loss location by Step 2. before applying the deductible (if any).

Step 4. Subtract the amount of deductible from Step 3.

The insurance company pays the lesser of Step 4. or the limit of insurance. Any amount that remains must be paid by other insurance or the named insured must pay it from its own funds.

F. Definitions

There are four definitions.

1. Computer equipment

Any electronic equipment that can be programmed to store, retrieve, or process data. Component parts and any peripheral equipment used exclusively with computer operations, such as air conditioning equipment or fire suppression systems, are also considered computer equipment. Other peripheral equipment is computer equipment but only if it provides communication, input, and output functions and data transmission. Data and media are not computer equipment.

2. Data

This is more than just data stored on media. It is also programming records used in equipment that is electronically controlled and those used to perform electronic data processing functions.

3. Media

The software, films, tapes, discs, drums, and cells and other electronic data processing, recording, and/or storage media.

4. Period of restoration

The period of time that starts on the date a covered loss occurs at a covered location. It ends on the date that the damaged property should have been repaired, rebuilt, or replaced with property of similar quality and done on a timely basis.

Note: The important phrase is “should have been” because considerable debate takes place between named insureds and insurance companies on how much time is appropriate.

ENDORSEMENTS

ISO has developed one specific endorsement for exclusive use with the Computer Systems Coverage Form.

IH 75 02– Portable Computers

The Computer Systems Coverage Form excludes portable computers, laptops, notebooks, and tablets but is not limited to just these. This endorsement is used to cover them. This property is subject to a separate deductible.

ISO has developed two general-purpose endorsements to use to respond to specific situations.

IL 09 35–Exclusion of Certain Computer-Related Losses

This endorsement can be used as an underwriting tool to exclude loss or damage from certain specific causes of loss.

IH 99 06–Schedule

Additional items can be listed on this schedule when they do not fit on the Declarations.

IH 99 22-Loss Payable

Loss payees who have insurable interests in covered property are listed on this endorsement along with the property in which they have that interest.

IH 99 23–Theft from Unattended Vehicle Exclusion

This restrictive endorsement eliminates theft coverage from unattended vehicles. The only exception to this is if the vehicle is locked, compartments closed and windows up AND there is evidence that a forcible entry had occurred.

IH 99 28–Business Income and Extra Expense Coverage

This coverage form insures business income and extra expense and is used in conjunction with non-filed inland marine coverage forms.

UNDERWRITING CONSIDERATIONS

Most property that computer policies cover is situated at fixed locations. As a result, underwriting the coverages provided involves evaluating the nature of the physical characteristics at the risk location in addition to determining the extent of management involvement to properly maintain and protect the property. Computer equipment is extremely sensitive and highly susceptible to loss or damage by fire, smoke, temperature change, and water. Some computer property is mobile in nature and transit and unnamed locations exposures must also be considered. In addition to evaluating location and transit exposures, the protective devices and services used to protect computer systems from loss or damage must also be evaluated.

Underwriting a given insured’s electronic data processing needs begins with obtaining a complete inventory of all equipment. This is more involved than just checking out various office machinery and equipment since the property could be used in any or all of an insured's operations.

The limits selected to insure the equipment must be realistic and reflect current market conditions. Equipment more than five years old (and in some cases far less) may have little or no residual value. Property lost or damaged is handled on a replacement cost basis with like kind and quality. A computer purchased five years ago for $10,000 may now be worth less than $1,000.

Once the equipment inventory is complete, the named insured must choose how to protect it. Options include insuring it as business personal property under a standard property policy. It could also be covered as electronic data processing equipment or business computers under an inland marine coverage form. Both options cover hardware and equipment but inland marine coverage forms are usually both broader and more expensive.

Arrangements that relate to covering software must be handled carefully. With older computer systems, it is more likely that the software was customized and altered internally. The result is that the documentation to help reproduce it after a loss occurs may be inadequate. Backup copies of any altered or customized software should be made in addition to the original software. All software should be backed up and duplicated regularly. The duplicates must be stored at a different location so that both sets are not involved in the same loss.

Virus and hacking coverage requires protective measures such as firewalls and other security features so that neither of these activities interrupts the operations. All equipment should have current virus protection software that is updated regularly or replaced as needed.

Surge protection and similar, related devices must be effective. It does no good to plug a grounded protective device into an unprotected outlet. Telephone equipment and connections also need similar surge protection to reduce or eliminate the chance that the modem will be destroyed.

Business assets exposed at off-site locations and property in various forms of transportation between premises is commonplace. Employees are frequently supplied with computers in order to work from home or during travel. The simple question of where the computers are located can lead in a number of different directions and present perplexing coverage dilemmas to resolve. However, this portion of an operation's exposures deserves as much care in underwriting as its fixed location considerations.